Essential Trading Lessons From Tesla and Elon Musk

Tesla has been one of the most controversial large caps stocks of the past year. There are several key incidents in the past 2 months that have gotten Elon Musk in trouble with the SEC, and have lead to some ridiculous volatility in the Tesla stock. This has created some great opportunities in the stock for momentum traders as well. Let’s start by doing a brief background explaining the controversy, and then look at the lessons for us as traders:

Background

There has always been a lot of controversy around TSLA and Elon Musk. It is one of the most shorted large cap stocks in the market, mainly due to its questionable fundamentals, ability to be profitable, and Elon Musk’s leadership abilities. In the past few months it has reached completely new levels of controversy. The mayhem began when Musk tweeted on August 7th: “Am considering taking Tesla private at $420. Funding Secured.” This tweet lead to some insane volatility in the stock for the next week, and month. Shareholders were left baffled about what the future of Tesla, as the erratic behavior of the CEO is creating a ton of doubt and uncertainty around the company.

SEC Punishment

The “funding secured” tweet created a lot of concern about his ability to take Tesla. Recently, the SEC decided to take action against Elon Musk and filed a lawsuit against him for the comments, based on the fact he did not actually secure the funding, and was misleading investors and shareholders. Musk and the SEC reached a settlement deal which forced him to step down as Tesla’s chairman and pay a $20 million fine.

The stock rallied on the news that Elon Musk came to a settlement agreement with the SEC. But then the situation quickly reversed on Tesla shareholders. Elon Musk on October 4th put out tweet mocking the SEC: “Just want to that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!” The stock tanked on Friday and is now trading in the 260’s, after trading in the 300’s just 3 days ago.

TSLA Daily

You can see how crazy the volatility has been in the TSLA stock for the past two months. Two times we have seen it tank to $250, and then bounce all the way back to the 300’s. The “funding secured” tweet caused TSLA’s stock to spike to all time highs, and then dump 100 points in the following days. This is has been an amazing stock for day traders the past several months. But not great for longer term investors. TSLA has been getting hammered the last few days following Musk’s tweet taunting the SEC. It is now approaching the key $250 support area, which has held the last two tests. If this level breaks convincingly, we could get a great shorting opportunity and see a quick dump towards the low 200’s.

Price Action Is King

Despite the questionable fundamentals of Tesla for many years, the stock has gone on a monster run the past few years, steamrolling the outspoken short sellers. Tesla bears for years have talked about how overvalued the stock, but for years the stock has continued to raise and squeeze shorts. There are ton of short sellers that blew up the past few years because of Tesla. They did not respect price action, and got stubborn. But now we are seeing signs that Tesla’s bull run could be coming to an end. The combination of Musk’s irrational behavior and the lower highs and lower lows on the daily chart could be spelling a sharp downturn in the stock in the near future.

Don’t Chase Strength Or Weakness

TSLA has seen some ridiculous swings the past couple of months. You can see on its daily chart how many times it has gone up and down 10% in a day. It has gone on several 100 point runs to the upside, and then gives it all back. A crucial lesson is that you cannot chase stocks just because they break all-time highs. If you bought TSLA when it broke out to all time highs last month, you’d be down over 30% right now. When trading a stock as volatile as Tesla, you have to be patient for the best entries and let the stock come to you. Never chase strength or weakness because you have FOMO.

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About Kunal Desai

Kunal Desai is the Founder and Lead Instructor at Bulls on Wall Street. Since 2008, Kunal has helped thousands of traders reach their trading goals through his unique live trading courses. Kunal is a day trader by day and industry leading instructor by night.

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